This article was authored by Davis Byrd, Financial Planning Associate.
Imagine two people washing their hands. Not a particularly difficult visual in today’s environment, is it? The first person applies soap, rinses their hands, and dries them off. Meanwhile, the second person rinses their hands, applies soap, then dries them off. Yuck. Both people have performed the same tasks in the same amount of time, but only one person has properly washed their hands. Why? Order matters. Similarly, the order in which your investment returns occur can have a dramatic impact on how long a portfolio can sustain a stream of income for a retiree.
While it is true that an investor will receive a particular average return in the long run, it is a mistake to assume that you will earn that same long-term average each year. In other words, you may average 6% over the long run, but you won’t make 6% each year. Returns are expected to fluctuate, and periods of negative returns are not abnormal. In the example below, Bill & Jane both average 6% and both suffered a year when they lost 25%.
But that’s only part of the story. For those who are taking retirement distributions, the sequence in which you receive your annual returns impacts the longevity of your portfolio. To illustrate, consider Bill & Jane, two hypothetical retirees. Both will retire at the same age with portfolios of $1,000,000, withdraw $40,000 at the start of each year, and earn a long-term average of 6% on their investments in their first four years of retirement. The caveat – the order in which their returns occur will be inverse. Note that the annual withdrawals are inflation-adjusted at 2.25%.
Year | Withdrawal | Bill's Portfolio | Bill's Return | Jane’s Portfolio | Jane's Return |
1 | $40,000 | $1,000,000 | 30% | $1,000,000 | -25% |
2 | $40,900 | $1,248,000 | 12% | $720,000 | 5% |
3 | $41,820 | $1,351,952 | 5% | $713,055 | 12% |
4 | $42,761 | $1,375,638 | -25% | $751,783 | 30% |
$999,658 | 6% | $921,728 | 6% |
Avelo Plans New Florida Nonstops Out Of ILM
Miriah Hamrick
-
Mar 30, 2023
|
|
Wawa Gas Station Proposal On City Planning Agenda
Staff Reports
-
Mar 30, 2023
|
|
Despite Banking Headwinds, NCino Reports Steady Growth In Sales
Jenny Callison
-
Mar 29, 2023
|
|
Riverfront Farmers’ Market Returns To Dock Street For 20th Season
Miriah Hamrick
-
Mar 29, 2023
|
|
Tech Roundup: New Software Platforms, STEM-ILM Event And Tech Awards Deadline
Johanna Cano
-
Mar 29, 2023
|
Book and media recommendations from Info Junkie Hoop Morgan, founder of The Forte Institute....
Doug Hamerski is a nephrologist who likes to spend his free time on other sciences, from circuity to radio. This pastime has now grown to a...
Areas throughout southern Brunswick County are seeing an increase in residents and development, leaving municipalities looking at how to pla...
The 2023 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.